Markets 2.0: Social Finance. Affinity Capital

The long tail, smart mobs
and social networking are driving the evolution of economics to Markets 2.0.
Social networks have been important venues for self-expression and interaction
and now, with an increasingly linked online populace, are starting to add a new
and important functionality, virtual aggregation for group power, both economic
and political.

Two key concepts in Markets
2.0 are Social Finance and Affinity Markets. Social Finance is the virtual
aggregation of dozens, hundreds or millions of people for the purpose of
conducting an economic transaction. Social Finance is also known as crowd
funding and crowd sourcing.

Affinity Markets are
marketplaces where transactions can occur based on affinity attributes. Not just
is the sweater red, woolen and made in China (legacy attributes) but under what
conditions was it made, were renewable materials used, did female entrepreneurs
make it (affinity attributes). Affinity Markets are also known as directed
capital, cause-based capital and (in online aggregations) virtual affinity
groups.

Platforms are also an
important emergent phenomenon in Markets 2.0; free technology platforms to
develop one’s own applications, such as Prediction Market platform Zocalo and
virtual world/MMORPG platform Multiverse.

Why is World of Warcraft so
addictive and successful (currently having about 6.5 million worldwide
subscribers)? Why do 90% of Americans report dissatisfaction with their jobs?
People are using virtual worlds to obtain what they cannot in the physical
world: venues for ongoing competition and winning, interacting with a wide
variety of others and having agency - the continuous ability to act and
experience the impact of one’s actions, all of which are above all fun.

People are shifting time,
energy, financial resources and attention to virtual worlds and other 2.0
Markets as these venues for fun, status, actualization and competition have
exploded. It is fun to bid, compete and win in prediction markets, loan
marketplaces, peer-to-peer donation and other new online spaces. Investing $2000
on Prosper in $50 increments provides 40 times to get the feeling of winning,
even if automated capital deployment is selected. Markets 2.0 seamlesslymerge work and fun, for example, Seriosity’s World of Warcraft version of
enterprise software.

The shift to virtual worlds
and other 2.0 Markets is also a transition to a post monetary economy. Monetary
currency is supplemented and potentially replaced by ideas, reputation, merit,
capability and whuffie. In
the Western world and increasingly every where, a declining percentage of total
income and total time need be devoted to basic survival
needs.

Social Finance and Affinity
Markets are now inexorably underway and will have an indelible impact on how all
economic transactions are conducted. There is already a proliferation of models
and types of transactions and payment mechanisms and infrastructure to support
this. The full potential of the transformative impact is largely unperceived.
Traditional economic institutions will likely be displaced if they do not evolve
in response.

What will it be like when
people can get their mortgage and home equity loans online from peer finance,
when anyone can have a local portfolio manager for commodities in India, when
million-member virtual BuyGroups bid for insurance and
healthcare services, when synthetic economies nominate and finance virtual
candidates for physical world office, when Socially Responsible Debt means that
states without measurable social progress cannot get their bond offerings
financed? How soon will eBay and Amazon begin merchandizing reputations and
allowing portability?

Markets 2.0 is about earning
and deploying capital and reputations and there are examples emerging in all of
the usual areas of economic transactions:

Affinity Investing is the
ability to direct and pool investment capital using much more specific
parameters than in the past and not just basic definitional attributes but
cause-directing the capital with a much closer link (possibly interactive) to
the end use and results of the investment.

Although green is the new
black, social responsibility is just one of many possible affinity attributes
that can be applied to stock investing. SRI’s implementation has been growing
over time. Initially, SRI meant mutual funds that did not hold tobacco, firearms
and alcohol stocks. SRI leaders like Citizens and Calvert have begun to include a second level
of in-depth screening for corporate governance, diversity, labor, environment,
human rights and other factors.

There are many more
dimensions along which firms can be evaluated. The next obvious affinity
attributes are measuring social impact metrics (such as those developed and
implemented by the Social Venture
Technology Group), number of patents or open source licenses (degree of
innovation), levels of carbon emissions and adherence to other green policies,
degree of workforce diversity at all levels and on-site daycare, etc.

Private Equity Affinity Funds

Like SRI public equity
funds, private equity affinity funds also have a “double bottom line” with both
financial and social objectives to meet, and are an important means of directing
social capital to non-public entities through portfolio managers who screen,
facilitate and monitor the investments. GoodCap is the innovator and pioneer in private equity
affinity funds, with a $30 million fund currently being raised. This new asset
class provides a purpose-driven investment vehicle for investors and unifies
formerly disjoint debt/equity investing and philanthropic
activities.

Socially Responsible Debt
(SRD) is the loan/bond analog to SRI stock funds. Articulated as one part of Urban Logic’s Sustainable
Resiliency strategy, SRD is debt that quantifies and measures good behavior
through loan covenants, for example cities issuing bonds based on their public
transportation utilization rates, infrastructure replacement costs and pollution
levels. Bond investors could select state bonds based on their affinity
parameters, for example, states with high levels of alternative fuel usage,
technology job creation and acceptability of progressive policies (stem cell
research, gay marriage, euthanasia, etc.). Bond funds would develop just as SRI
equity mutual funds for example the “Boomers Balanced Fund,” or “Green Bond
Fund,” affinity products which would appeal to the values and financial return
goals of retiring boomers.

Online lending marketplaces
like Prosper and Zopa are taking advantage of social networking
to virtually aggregate lenders to fund loans, a model which could replace
traditional financial institutions. This new “eBay of loans” concept is the
biggest breakthrough in credit products since junk bonds. The ease and immediacy
of obtaining sizeable web loans, essentially “Get Money Now!”
cannot be overstated.

Prosper loans are unsecured,
and have a $25,000 maximum amount ($4,000 average) and a three-year term. The
interest rate is set by lenders bidding down from the borrower’s maximum
acceptable rate. Borrowers list their loans for free, agreeing to have their
credit ratings posted publicly (an interesting proof of utility triumphing over
privacy in transparency matters). If the loan is funded, Prosper takes 1% of the
proceeds from the borrower and 0.5% per year of the average balance from the
lender, substantially shrinking the 10% spread in traditional bank lending and
borrowing. Borrower defaults are reported to credit bureaus and a collection
agency is hired but lenders main default risk strategy is diversification and
small investment amounts ($50 minimum). As of October 2006, approximately $15
million has been borrowed on the Prosper platform.

Lender capital can be
directed to specific loans based on recipient profile attributes (geographical,
gender-specific, political, economic, race, ideological, commercial affiliation,
alumni, etc.), for example, lending to African American single mother
Katrina-displaced entrepreneurs or libertarian vegan senior citizens in
Vermont or NRA member males in
Oklahoma; any and every affinity profile is
supported.

Groups are a feature of the
Prosper marketplace, in hopes of stimulating low default rates through social
pressure like the Grameen Bank and
other micro-finance models, but Prosper’s groups are bit more like multi-level
marketing than full affinity financial communities in their current
implementation.

Grameen-style peer-to-peer
(P2P) micro-finance is also available through Kiva, where investors can make cross-border loans in $25
increments to developing world entrepreneurs who have been screened by onsite
Kiva Field Partners. Despite Kiva’s cause-directed venue for world-is-flat capital, it
falls short by failing to build social community; lenders cannot click and see
who else has committed what amounts, even if by anonymous handle.

Real estate is another area
where peer-to-peer aggregation could be very effective as affinity groups pool
money for real estate investments which are prohibitively expensive to access
otherwise. Peer-to-peer real estate investing also has a better risk profile
than going it alone since as with the peer-to-peer lending model, individuals
can invest small amounts in multiple projects, effectively syndicating the risk
of the asset class.

Prediction Markets are an
important emerging phenomenon in behavior and social finance where millions of
individuals log their predictions of the outcomes of a variety of events ranging
from political elections to microprocessor wars to celebrity status. Either
fictitious or real money or points are used to keep score.

Economists like Wharton
Professor Justin
Wolfers have shown that the crowd wisdom of Prediction Markets often beats
traditional forecasting methods. Prediction Markets are becoming an increasingly
important venue for price, opinion and information discovery. There are several
existing prediction markets and free platform software like Zocalo for
users to develop their own.

ReputationBuilding through Affinity Investing

As successful World of
Warcraft players started listing their attained levels on their resumes as a
proxy for achievement, team-work, leadership and tech-savviness, individuals are
also building reputations online with Affinity Investing. In fact, as eBay and
Amazon showed, it may be impossible without a reputation and the trust it
engenders to transact at all or at least in scale in online communities.

With today’s online linked
world and Affinity Investing, reputations will only be more important and should
be portable across sites, maybe federated reputations can work before universal
identity and login. In fact, as Dick Hardt of Sxip suggests, eBay should merchandize out user reputations,
which could be achieved with web widgets or badges. eBay may not realize that they should actually be in the
reputation business in their next phase, just like PayPal may not realize they
could be the escrow business of the future.

Prediction markets,
including RMM (real money markets) like HedgeStreet, allow users to see the
track record of other investors/speculators and people are building potentially
commercializable reputations for themselves via their virtual performance
(another way to self-actualize on the Internet).

Online brokerages could
enable investors to share their portfolio (stocks, not amounts) externally and
publish historical returns. Lending marketplaces like Prosper could also give
lenders the option to make their lending portfolios publicly viewable with
site-validated returns.

Crowd sourcing, peer-to-peer
donation finance

Peer-to-peer funding,
essentially lots of people (dozens, hundreds) each contributing $10-50 is taking
off both in loans (Prosper, Zopa) as discussed above and also in donation
support for a wide variety of arts, humanitarian and software development
projects. What is different in Philanthropy 2.0 is the explicit and tangible
agreement of the expected action from the recipient in exchange for the
donation.

Fans are financing bands at
Sellaband,
movies at A Swarm
of Angels, and citizen vlogging at HaveMoneyWillVlog
(via an easy-to-use crowd finance Wordpress
plug-in which also lists the deliverables and a feedback loops for on-project
progress). Austin-based Fundable
is a clearing house crowd funding site suggesting project financing for
individuals, non-profit organizations, relief efforts and software development
projects on its platform.

A minimum contribution of
$10 is generally required and the total amount to be raised is still low,
ranging from a few hundred to a few thousand dollars. PayPal, in a burst of extensibility which
could redefine its future business, provides escrow functionality and other
mechanics of crowd pledging and funds disbursement.

A response to declining NSF,
other government and corporate research budgets, OpenBasicResearch would be a
larger-scale application of the Fundable and HaveMoneyWillVlog models where
individuals, research teams and companies could post projects to solicit funding
and interested parties could pledge and fund (tax-deductible) anonymously or
publicly. Project results would be open-sourced and collected into a meta-level
cohesive whole for public benefit, highlighting that negative results are also
quite useful in the extension of human knowledge. Deliverables could be
monitored online with subsequent project phase funding not released until
approved by project sponsors.

As with crowd sourcing
donation support, individuals or groups could compete and bid for personal
foundation and bequest resources. Economics and software tools will now be
allowing individuals without substantial wealth to set up personal foundations.
With software plug-ins, anyone could set up a donations section on their website
to organize and conduct their charitable giving and publish their supported
organizations/projects.

Affinity Purchasing includes
both selecting purchases of goods, services, information, etc. by their
attributes and executing the purchase transaction in aggregation with others
making the same purchase (GroupPurchasing).

In Collapse, Jared Diamond
cites the Forest Stewardship Council who
certifies worldwide forestry practices and lumber products and the Marine Stewardship Council which does the same
for seafood. Some test examples suggest that customers are willing to pay a
premium, perhaps as much as 20-30% more for a socially-responsible product but
some degree of price parity is probably necessary for large-scale acceptance.
Although, the organics and hybrids examples have shown that people are willing
to pay an SR premium.

GroupPurchase is the
aggregation of multiple buyers for the purpose of commanding a volume discount
in a purchase transaction, an idea that is also not new and has been deployed
for years in community and vertical purchasing co-operatives. What is new is the
scale over which GroupPurchase can now be deployed on the
Internet.

There was an early wave of
GroupPurchase with Web 1.0 companies: Ariba (focus: spend management) and
Commerce One (now Perfect Commerce, focus: Supplier Relationship Management
(SRM)), GroupPurchase (focus: small business) and Ctribe and DMob (focus:
consumer electronics). Only the enterprise group purchase companies remain
currently and have shifted their focus to supplier management but the time is
ripe to re-deploy GroupPurchase in the consumer space.

GroupPurchase is an obvious
and monetizable feature for social networking communities such as MySpace, Facebook, etc. It should just be a matter of
time until community members can click to add themselves to a virtual BuyGroup for any of a variety of desired purchase items.
Price, timing and other specifications could be set.

With the massive numbers of
online community members, insurance is a natural product. Large groups of
individuals can disclose and pool their personal attributes and bid for coverage
from insurers. Insurance providers could have even more liquidity and
flexibility to diversify their costs and risks in ways that they are only able
to do now with employee groups.

Marc Smith’s Project Aura at Microsoft
Research is an indication of the next level of what Affinity Purchasing could be
like in the future. Project Aura is a mobile software application for scanning
product barcodes and building a database of reviewed products. The basic product
information could be mashed-up with trusted affinity attributes including
conformity to a diet program, SR ranking, celebrity endorsement and many other
user-selected personal affinities.

Urban Logic envisions a similar version of
this, the Means Meter, mobile device software that would scan a product and
immediately identify its rating on a scale of user-specified values (e.g.;
labor-friendly, ISO 14001-compliant factory, degradable materials, etc.). Urban
Logic sees the Means Meter fitting into a broader system of SR banks and credit
cards with user rebates for SR purchases.

Especially with RFID tags,
the future could include a proliferation of Affinity Tags on products in
physical world, Internet and metaverse world shopping. Affinity Tags could be
physically visible stickers or certification symbols, or information that pops
up when the item is scrolled or scanned or if permissioned, beeps to signal the user of its compatible
affinity status (a more subtle and user-controlled version of the targeted
advertising example in Minority
Report).

Just as people may want
website widgets that post and update the donation activity of their personal
foundations, they may also want to post their affinity purchases via website
widgets called shopcast badges by ThisNext who
offers the functionality. Of course merchandisers are beyond excitement with
this word of blog recommendation mainline to customers and there are ample
business model innovations to share margin/referral fees with recommenders or
their personal foundation donation recipients. Celebrity gossip and shopping
site PopSugar is an
under-implementation of Affinity Purchasing by not identifying (or even
connecting product items to celebrities at all) the apparel and accessories worn
by celebrities and offering an immediate click to buy. Click on the fab sunglasses Eva Longoria is wearing to buy them now! would be a much better option.

Individuals and
organizations are starting to be able to use affinity attributes to identify
each other for remunerative projects. Employees are demanding more progressive
work environments and corporate values which mesh with their own affinities.
Employers are using more granularity to select their
teams.

Top Coder is a website for programmers build
reputations by competing to deliver the best coded solution to a given problem.
The earned reputations confer status which presumably could be monetized
depending on the objective of the coder. World-is-flat geographically disbursed
virtual teams can be assembled ad-hoc based on reputation and skill affinities
for the purpose of executing a project and then disbanded.

Rent A Coder is a
reputation-based marketplace for software programming projects for development
teams or individuals to bid for paid projects. Like the eBay model, a site
reputation is crucial to securing projects. Presumably reputation-based online
clearinghouses for project work will continue to expand.

Businesses have long been
signaling to their clientele with affinity attributes such as minority or
women-owned, GLBT friendly, se habla español, etc., or via their values such as
Hewlett Packard’s tag phrase “HP Invent” and IBM’s “Think.” The increasing
granularity of attributes would allow for a new level of signaling between goods
and services providers and consumers, and as with Purchasing Affinity website
shopping widgets, facilitate referrals.

MMORPG (massively
multiplayer online role-playing game) video game (Ultima Online, EverQuest,
World of Warcraft, Lineage, etc.) and metaverse world (Second Life, Sims Online,
There) economies are rapidly eclipsing the GDP of many countries in the size and
volume of their economic activity. For example, metaverse world Second Life has
been recording $7M USD of transactions occurring in-world per month since July
2006, and surpassed one million registered residents on October 18,
2006. Economist Ed Castronova
was one of the first to formally measure MMORPG economies and estimated that in
2004, the economic activity in and around EverQuest was comparable to the
economy of Namibia. (Reference)

RMT (real money trade) - the exchange of virtual
world goods or currency for physical world currency. RMT is conducted informally
and through currency exchanges, on eBay (thousands of concurrent auctions) and
through other dedicated sites, which often have superior exchange
rates.

Virtual world economies
represent the great proliferation in which economic agents can conduct affinity
transactions. The lines between physical and virtual world presence will
continue to blur, as will the relevancy of the location of economic
transactions. Physical world transactions, for example some degree of Wells
Fargo banking and financial services can be conducted in-world. Internet
shopping research can occur more effectively in a 3D world where product
information and prototypes can be reviewed in an interactive multidimensional
environment aided by an immediately available dedicated sales avatar, or not.
Instead of reading forums for product reviews, in-world meet-ups could provide
live interactive user reviews.

Concurrent with the
evolution to Markets 2.0, political participation can become truly popular and
democratic (assuming universal Internet access and usability) with daily issue
opinion polls and voting by email. Political views could be instantaneously
polled at the local, state and national levels. Social sites could post running
polls or indices, real-time political thought barometers that became sources
looked to by other voters for opinion-sharing instead of marketing efforts by
the politicians themselves. Fundraising, campaigning and lobbying could all be
carried out via Political Affinity Markets. Accessible politician online voting
records and more of a markets approach to political issues would trigger a
significant shift in the role of politicians, becoming more of the architects
and executors of SR Debt programs for their constituencies for
example.

The shift towards the
Affinity Economy has been portrayed here at the level of the individual, as the
individual becoming an increasingly powerful economic agent in all manners of
earning deploying capital and reputation in an expanding number of
affinity-driven marketplaces.

The same Affinity Economy
can operate even more powerfully at the community level, initially for physical
communities such as families, neighborhoods, cities, counties, municipalities,
states and nations and eventually for virtual economies.

Melanie
Swan is a futurist, professional trader, markets expert, technology
entrepreneur and blogger based in Silicon
Valley.

She founded and sold a technology startup company,
GroupPurchase, which aggregated small business buying groups. She was Director
of Research at Telecoms Consultancy RHK/Ovum and previously held positions at
iPass, JP Morgan, Fidelity and Arthur Andersen and has been an advisor and
consultant to numerous technology companies.

About Me

Robert Searle was educated in Windsor at the Royal Free, the Tutorials, and East Berkshire College. He is the originator of two major "work in progress" Paradigms known as Transfinancial Economics (TFE), and Multi-Dimensional Science (MDS).The former believes that new unearned money could be electronically created without serious inflation notably for key environmental, and
socially ethical projects. Multi-Dimensional Science though presents an unique "scientific" Methodology by which claimed psychic, and spiritual "phenomena"could possibly be "proved".
Apart from the above, Searle has proposed the development of the Universal Debating Project, an interactive "encyclopedia" of virtually "all" pro, and con arguments for practically any subject in the world.He is the creator too of a tribute blog on the musician, and broadcaster David Munrow (1942-1976), and a pioneering one on Contemporary Early Music.Furthermore, he has a very large audio-visual collection of Medieval, and Renaissance Music (manually created as Searle8), and has an "unusual" musical project involving improvisation which could also open up a "new" approach to music.